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    Islamic Microfinance in Palestine: Challenges and Prospects

    Md. Sohel Rana1, Mohd Nazari Ismail1, Izlin Ismail2

    1. Department of Business Strategy and Policy, Faculty of Business and Accountancy,

    University of Malaya, Kuala Lumpur, 50603, Malaysia

    2. Department OF Finance and Banking, Faculty of Business and Accountancy,

    University of Malaya, Kuala Lumpur, 50603, Malaysia

    Email Address: sohelnaim@gmail.com (Md. Sohel Rana), mdnazari@um.edu.my

    (Professor Mohd Nazari Ismail), izlin@um.edu.my (Dr. Izlin Ismail)

    Corresponding Author: sohelnaim@gmail.com

    Abstract: The objective of the paper is to identify challenges and opportunities in Islamic micro

    finance industry by reviewing the present status of Islamic microfinance in Palestine and later

    suggestinga multiple-stages financing model which will alleviate poverty significantly. To

    accomplish this purpose, we obtain secondary data from various sources. We suggest a financial

    framework incorporating several Islamic financial models and the sources of fund applying into

    different levels of poverty in Palestine.The paper concludes with some policy recommendations,

    which may potentially create small entrepreneurs and alleviate poverty to a certain extent.

    Abstrak: Tujuan dari makalah ini adalah untuk mengidentifikasi tantangan dan peluang dalam

    industri keuangan mikro syariah dengan meninjau status sekarang dari keuangan mikro Islam di

    Palestina dan kemudian menyarankan model pembiayaan multi-tahap yang akan mengurangi

    kemiskinan secara signifikan. Untuk mencapai tujuan ini, kami mendapatkan data sekunder dari

    berbagai sumber. Kami menyarankan kerangka keuangan menggabungkan beberapa model

    keuangan Islam dan sumber dana menerapkan ke dalam berbagai tingkat kemiskinan di

    Palestina. Makalah ini diakhiri dengan beberapa rekomendasi kebijakan, yang dapat berpotensi

    menciptakan pengusaha kecil dan mengentaskan kemiskinan sampai batas tertentu.

    Key Words: Islamic Microfinance, Palestine, Challenges, Prospects.

    JEL: F63

    mailto:sohelnaim@gmail.commailto:mdnazari@um.edu.mymailto:izlin@um.edu.mymailto:sohelnaim@gmail.com

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    Introduction

    The conventional and Islamic microfinances are becoming professional industries and offering a

    wide range of products to the poor population all over the world. Both the concepts got the wide

    range of global acceptance to pull a certain segment of the population by making them enabled in

    generating income and changing their lives with small capital they get as a micro finance from

    Microfinance Institutions. The conventional microfinance was initiated in order to eradicate

    poverty by giving a small amount of credit to the poor by charging interest. On the contrary,

    Islamic microfinance was introduced to give a substitution to interest. The Muslim population is

    increasing rapidly in the world. According to (Haub et al. 2011), It is estimated that the Muslim

    population on this earth may reach to 2 .2 billion by 2030.The World (Bank 2012) shows the

    almost 896 million people live on earning less than USD 1.90 per day.The Muslim countries are

    facing high unemployment, poverty and low level of financial access which predominantly

    created a huge demand of micro-credit and reached successfully in the poor Muslim countries

    like Bangladesh and Indonesia. The excessive number of poverty in the Muslim countries is

    believed to be the improper way of financing with high interest rate to the poor people of those

    countries. The interest is strictly forbidden in Islamic law. The high interest rate is depriving the

    poor people from improving their living standard and other benefits. Thus the ultimate goal of

    microfinance of eradicating poverty and keeping it in the museum is becoming unsuccessful.

    The Islamic financing system to the poor Muslim people living all over the world that support

    religious perception against the interest rate in conventional micro financing is becoming a

    formidable way to make the millions of poor Muslims economically solvent which will bring

    them out of the fence of high interest payment. Islamic microfinance will involve the poor

    Muslims in sharia compliant suitable credit system and bring the unbanked poor under the

    umbrella of Islamic microfinance.

    According to(Nimrah Karim 2011), almost 20 percent of the people in Algeria and Jordan

    denied conventional microfinance and giving the excuse of the religious region. In case of

    Yemen and Syria the percentage rises to 40 percent. According to (Karim et al. 2008)revealed

    that the local practitioners and key informants suggested similar demand trends in Indonesia,

    Afghanistan, Pakistan, and the Palestinian territories and also Muslim majority areas of India, Sri

    Lanka, Brunei, Cambodia and the Philippines. Islamic microfinance shows an alternative model

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    for those poor people who are not currently entertained by conventional microfinance. Thus it is

    rather important for this thriving industry to come up with some innovative and comprehensive

    microfinance business model in order to provide sustainable services which will meet the

    financial demand of the Muslim poor. The present status of Islamic microfinance in the world is

    the USD 1 billion which is still less than 1 percent of Islamic finance market (USD 1.6 trillion).

    Moreover, around 300 microfinance institutions are operating worldwide. The major markets of

    Islamic microfinance includes Sudan, Yemen, Pakistan, Indonesia, Egypt, Qatar, Bahrain,

    Jordan, Mali, Lebanon, Syria, KSA, Iraq, Palestine, Afghanistan and others (Ahmed et al. 2015).

    Religious perception towards the conventional way of lending created necessity to establish a

    suitable lending system which would meet the demand of Muslim people. According to (CGAP

    News 2008) survey demonstrated that global Islamic microfinance is contributing very little and

    operating merely in few countries (80% of the 380,000 clients of Islamic microfinance

    worldwide are in Bangladesh, Indonesia and Afghanistan); Furthermore, the practice of Islamic

    microfinance is very little, and it does not surpass more than .05 percent of total microfinance

    outreach. In case of Arab world, Microfinance Institutions (MFIs) that have been operating for 7-

    10 years typically only reached between 2000-7000 active borrowers through Islamic

    microfinance.Therefore, Islamic microfinance needs to be promoted to the poor Muslims as

    potential a weapon to fight against poverty. It can develop a valuable human capital base in the

    Muslim community and positively contribute towards the economic growth in these countries.

    The Islamic Microfinance concept is comparatively new, and it is still facing challenges and

    difficulties. Palestine is relatively a conservative Muslim country with extreme poverty and

    surrounded by different political and economic problems. According to World Food Programme

    WFP (2014) Palestine economy went through a recession specially the Gaza faced a negative

    growth and had a sever effect on unemployment which went up to 43 percent. The youth

    unemployment in Gaza soared to 60 percent and overall unemployment in West Bank and Gaza

    increased to 27 percent in 2014. The Palestinian economy is basically aid driven, but aid cannot

    be a sustainable long-term solution for a nation to be developed. Therefore, it is important to

    come up with some formidable Islamic micro financing models which will make the economy

    dynamic by creating entrepreneurial opportunities in the SMEs and agriculture which will

    ultimately open a number of job opportunities.

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    Therefore, the objective of the paper is to identify challenges and opportunities in Islamic micro

    finance industry by reviewing the present status of Islamic microfinance in Palestine and

    subsequently, provide a sustainable multiple-stages financing model which will alleviate poverty

    significantly complying with the Islamic regulations.

    Literature Review

    Islam does not allow interest and any other activity, which is not permissible by the sharia or

    Islamic law. On the other hand, interest is supposed to be a drawback of poverty eradication.

    According to(Mollah & Uddin), mentioned that 98 percent of the borrowers under microfinance

    program are not aware of the terms and condition of loan and interest rate, and they are

    completely disadvantaged, on the contrary, Islam ensures social justice and equity, which guide

    to balance and peace in the society.

    Muslims have always been struggling for years to retain their values and cultures in almost every

    sphere of their lives. (Frasca 2008)focused on the competitiveness of Islamic microfinance and

    argued that Islamic microfinance could be a potential sector for the investors who faced badly in

    the global credit crisis of the conventional and speculative credit system.(Akhter et al.

    2009)conducted a survey on 125 institutions in 19 Muslim countries. It revealed that Islamic

    microfinance merely reached to 300,000 clients, Bangladesh contained one third of them

    alone.They further mentioned that itwas very important to concentrate in crafting affordable

    micro financing models, training and retaining skilled loan officers and administrators,

    improving operational efficiency and managing overall business risks to reach more

    people.(Obaidullah 2008), concluded that the commercial banks and other Islamic financial

    Institutions are not interested in financing micro loans to the lower-income people and Small and

    Medium Enterprises in the society and demotivated due to the absence of collateral or credit

    guarantee. He further mentioned that it is important to make a linkage among various

    organizations, including government agencies, None Government Organizations (NGOs), None

    Profit Organizations (NPOs), cooperative companies, Takaful so that they can reach to the

    poorest of the poor of a society significantly. The linkage between the organizations will

    fruitfully contribute in the micro-enterprises development which will ultimately eradicate

    poverty significantly from the grass root levels of a society.According to (Mohammed) describe

    the IDLO Report (2009), Islamic microfinance got less attention and remained less developed in

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    the Arab world than the other countries in Asia, Africa and Latin America. In the Social and

    Development Summit in Kuwait city at Arab Economy in 2009, the League of Arab States

    declared the formation of the USD 2 billion fund run by the Arab Development bank to establish

    and implement microfinance programme which targeted at boosting small businesses and

    alleviates poverty across the Arab World.

    According to (Barden 2010)A number of aid and assistant programmes are being provided in

    West Bank and Gaza region to support for a strong and healthy financial sector on a large scale

    which will contribute to financing for infrastructure projects. In case of promoting small

    businesses and individual a wide range of micro financing programmes has been undertaken. The

    financing programmes are specially shahriah based and becoming increasingly widespread in

    these days in Palestine.

    Data Collection and Methodology

    The data collected is mainly from the secondary sources from various journal papers, books,

    different official reports, scholars studies, newspapers, website, government reports and other

    sources. This paper puts an effort to theoretically review the microfinance industry in Palestine

    along with the Islamic microfinance models, challenges and opportunities. Furthermore, this

    paper suggests multiple- stages integrated model, which will probably be able to fit socio-

    economic and political condition of Palestine and alleviate poverty.

    An Overview of Islamic Micro-finance and Islamic microfinance Practice in Palestine

    Micro-credit was first introduced in 1980s in the occupied Palestinian territory for the rapid

    growing demand for financing from small and microenterprises, which were the backbone of

    production and employment in Palestinian economy(Dodeen 2013). Before the establishment of

    Palestinian National Authority, microfinance associations were the only source of financing.

    Afterwards with the monitoring of Palestinian National Authority microfinance organizations

    have expanded and attracted attentionof donors given the role of microfinance as one of the key

    elements for development and the fight against poverty.As a result the number of financing

    institutions, registered NGOs and international organizations have increased remarkably. In

    1996, West Bank and Gaza Strip were given a limited political and economic autonomy to be

    administered by Palestine National Authority(Arnon & Weinblatt 2001). Since then the territory

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    is experiencing a high degree of political instabilities, military interventions and conflicts, which

    have been deeply discussed all over the world but a very little attention has been given to

    evaluate economic and business environment. The development of the credit sector was even

    more neglected especially the result of negligence of the contribution and dynamism of banks

    and not-for- profit organization in practicing microfinance was serious, which hindered smooth

    economic performance. This cannot be kept as a passive element which respond to the stimuli

    coming from the real economy(King & Levine 1993). The Palestinian economy is largely relied

    on Aid. Therefore, the dependence on external donations has major implications in terms of

    domination and performance, since donors are mainly motivated by political and ideological

    aims.The main reasons for the poor performance and the fluctuation of Palestinian economy have

    been attributed to the Israeli policy of limiting the free movement of goods and people from and

    to Palestine. Basically, there is less literature on the topic of the development and functioning of

    microcredit industry in Palestine and thus the paper will fill that gap. Since the regions in

    Palestine are poorer and the banks cannot generate loan utilizing its deposit, therefore the

    emergence of Islamic microfinance industry can be the obvious alternative in this perspective.

    Although West Bank has gained a measure of economic growth assisted by donors aid programs

    and nine million members of Palestine diaspora who have sent their hard-earned money as

    remittance to help relatives or funds fledgling business activities. Despite this growth, wealth has

    not been evenly distributed to the people of West Bank. (Barden 2010) addressed that 50 percent

    of the West Bank Population live under the poverty line. In the village many people still live a

    Bedouin lifestyle, preferring tents or impoverish housing shelters.

    Since transaction of interest is prohibited in Islam and for the devoted Muslims in Palestine, the

    financial system is guided by the principles of Shariah where riba meaning that charging

    exorbitant rates of interest are totally forbidden. Therefore, microfinance Department o...

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